Nucor believes the agreement will provide the company with a reliable, low-cost supply of natural gas for its current and future gas needs for more than 20 years, Nucor said in a statement Tuesday.

The agreement calls for Nucor to pay its share of costs plus an additional amount of carried interest as each well is drilled, subject to a cap on carry paid for each well and a cap on total carried interest. Drilling may be suspended by either Nucor or EnCana if U.S. domestic gas prices fall below a predetermined threshold.

Encana will serve as operator and provide expertise to drill, complete and operate the wells. The agreement is for drilling in areas with proven reserves. The production of wells that have been drilled and are producing under the 2010 agreement is exceeding expectations that Nucor modeled for that investment by more than 60 percent.

The new agreement is in addition to an earlier and smaller onshore gas drilling agreement established with Encana in 2010. The agreement will ensure a sustainable competitive advantage in gas costs for Nucor's direct reduced iron (DRI) facility currently under construction in Convent, La.

The facility is expected to begin operations in mid-2013 and will significantly increase Nucor's gas consumption. Nucor may build additional DRI capacity at the Louisiana site, which will further increase Nucor's gas usage. The gas wells drilled as a result of the agreements is expected to provide enough gas to equal Nucor's usage at all of its U.S. steel mills plus gas consumption at Nucor's two DRI facilities, or alternatively three DRI plants.

The natural gas drilling and production activity associated with the agreements is focused on Encana's Piceance Basin assets in northwest Colorado, a company spokesman told Rigzone.

Encana has proven resources of 1.5 trillion cubic feet equivalent (Tcf) in the Piceance Basin. In 2011, the company drilled approximately 141 net wells in the Piceance play. Encana produced 446 million cubic feet equivalent per day from its Piceance assets last year.

The spokesperson could not comment on the price threshold at which the agreement could be halted nor the number of wells and production associated with the agreement.

The agreement is "very long-term" and depends on a number of factors, including the pace of Nucor's facility development. The agreement is smart for both sides in that it gives Encana certainty in the execution of its long-term development strategy and helps support incremental demand for natural gas and gives Nucor access to gas supply over the long-term.

"We are always searching for ways to improve our competitive position and drive sustained value creation over cycles," Nucor Chairman and CEO Dan DiMicco said in a statement. "The increased exposure to natural gas prices that will accompany our current and potential DRI production, combined with the tremendous advances that have been made in the natural gas industry, have created a unique opportunity to leverage our strong balance sheet to create what we believe will be a lasting competitive advantage for Nucor."

The shale gas boom has triggered a manufacturing renaissance in the U.S. steel industry as steel companies seek to meet demand for steel in oil and gas operations, from the drill pipe to the well casing and well tubing, as well as gathering, lateral and transmission lines, according to a recent report from the Clean Skies Foundation. Demand for steel in the oil and gas industry is expected to total more than 66 million tons between 2008 and 2017.

The use of low-priced U.S. natural gas as an industrial feedstock also makes the U.S. steel industry competitive again in manufacturing, the report noted.

The United States now has access to ample natural gas resources thanks to the deployment of drilling and production technology, according to the report. The U.S. Lower 48 is now estimated to have a recoverable gas resource base of more than 3,500 Tcf and 200 billion barrels of crude oil and lease condensate liquids, up from 1,100 Tcf of gas and 150 billion barrels of liquids in 2008.

Thanks to horizontal drilling and hydraulic fracturing, U.S. gas production in 2017 will be over 6 Tcf per year higher due in part to the use of the new technologies and representing a volume that is nearly double U.S. gas imports in 2011 of 3.5 Tcf.

Karen Boman has more than 10 years of experience covering the upstream oil and gas sector. Email Karen at kboman@rigzone.com

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